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The Spinner's Circle

Wall Street keeps looking for the next Enron, but the real nightmare is Global Crossing, whose method for spinning gossamer profits is perfectly legal -- and much more widespread.

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The first time I ever heard the term lazy Susan -- when it was not in connection with the round platform that revolved on my mom's dining-room table -- was eighteen months ago, and I couldn't believe my ears. An executive, a prominent executive of a major communications company, had told me how it worked. He said that he would give my company, TheStreet.com, a $6 million investment -- his company was brimming with cash, flush from an underwriting -- and then I would give it back in return for, well, doing nothing. We would get the imprimatur of the transaction with someone "respected" in the business, and his company would book the revenue. Let me get this straight, I said, you would give us an investment, but it would just be put right back to you in the form of some services payment? He nodded. "Sure, like a lazy Susan, you know," he said, and flicked his wrist as if to spin that lazy Susan filled with goodies toward me and then flicked it again so it was clear that it would come back to him. "Everybody's doing it."

I thought to myself, Holy cow, that's got to be illegal, but what the heck did I know, maybe the accountants blessed stuff like this these days. I mean, they did bless an awful lot of funny business at the end of the millennium. "Won't we get in trouble?" I asked. "Well, you don' t have to advertise that it's a lazy-Susan deal," he explained. I passed. I said that we wouldn't take money just to hand it back, that we had to do something with it, and if things worked out and it generated revenue, maybe we could do some business. He looked at me like I was nuts: "Why would I want to give you the money then?" With that, I got up and left a meeting that, had I done the deal, would have garnered lots of headlines and made lots of people happy even as we were doing nothing economic, nothing economic at all. And I found myself wondering how many companies I was investing in were also booking these lazy-Susan profits.

Earlier this month we found out how prevalent this lazy-Susan stuff was -- and is -- when the former financial officer of Global Crossing, which just filed for bankruptcy, alleged that Crossing had done a lazy-Susan deal with Qwest (which has denied the charge). He called it "round-tripping," another term for this chicanery. It inflated Global Crossing's and possibly Qwest's bottom lines.

If ex–Enron execs weren't taking the Fifth on national television, believe me, the focus would be on the stuff that went down at Global Crossing, because in many ways Global Crossing is even more frightening than Enron. That's because round-tripping, unlike the phony fictions of Enron, is a legal and accepted practice in New Corporate America. I can't tell you exactly how many dot-coms made their livings off lazy-Susan deals. But I do know that this was the established way to do business in the New Economy. I can think of a half-dozen lazy-Susan deals that I know personally, although they would all probably claim that there was some economic purpose behind the deal. Web and telecommunication companies took the money (and gave it right back) because without it they couldn't make Wall Street's projections. And executives readily acceded to eating at the lazy Susan because they couldn't fool people any more with barter revenue, its predecessor in the fictional operating game.

Right now the Street thinks it's in the grip of Enronitis, the disease that consists of creating off-balance-sheet partnerships that can miraculously and illegally turn capital gains -- even capital gains not taken -- into operating earnings. I think that is a false plague, a Legionnaires' disease, if you will, that kills a few who catch it and then vanishes, never to strike again. I can't imagine a company even trying to get away with Enroning the books after what's happening to the Enron team now.

To me, the more likely contagion is the illness that overcame Global Crossing, because unless you have someone come forward and admit that the money was taken under a round-trip quid pro quo, you can't be sure who else is still doing it. Oh, it may not always be done with the same blatant I-give-you-money-you-give-me-money stratagem, but it's definitely happening more than you think. In fact, around the same time that Global's former financial vice-president was calling attention to the company's problems, the Wall Street Journal accused Elan, a specialty drug company, of using some very lazy-Susan-ish accounting of its own, and the company's stock plunged.

So which industries do I think are most likely to catch this plague?

Telecommunications companies and their providers are just desperate enough, in a falling-revenue environment, to succumb to lazy-Susan configurations. I would not be surprised if some of the larger providers made a host of these kinds of deals to keep sales propped up. Biotech companies, which can take public money and give it to other entities, which can then pay them back in "revenues," are susceptible, too. Unless auditors are willing to ask tough questions about what was received for payments and why "investments" were made with companies that seemed rapidly to turn and buy services from the investors, we are liable to see the disease surface repeatedly in the next few quarters, as deals agreed to pre–Global Crossing continue to generate the round-trip.

How serious is the contagion? Let's put it this way: When I got in the business of stock picking, the watchword was that earnings could be manufactured by clever accountants, but that sales and cash flow never lie. Lazy-Susan deals put the lie to that. And they make me feel like any company that came of age during the period when these deals passed muster must be checked and double-checked to be sure that the revenues are real and not just regurgitated.

TheStreet.com
Check out TheStreet.com's "10 Questions" feature this week. Peter Doyle, of Kinetics Internet Fund, is on the hot seat. Available free of charge at www.thestreet.com

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.

E-mail: jjcletters@thestreet.com.


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